EI Group Regulatory News (EIG)

21 November 2017

Ei Group plc

Preliminary announcement for the financial year ended 30 September 2017

Beginning to accelerate the execution of our strategic plan

Ei Group plc (EIG or Group), the largest owner and operator of pubs in the UK, today announces its final results for the year ended 30 September 2017.

Financial highlights

Ø Net asset value up 5% to £3.13 per share (2016: £2.96 per share) underpinned by like-for-like net income growth, asset appreciation, cash generation and net debt reduction.

Ø Underlying EBITDA# of £287 million (2016: £292 million), in line with expectations and reflecting the impact of planned disposals

Ø Underlying profit before tax# of £121 million (2016: £122 million) as interest savings from reduced debt broadly offsets reduction in EBITDA

Ø Statutory profit after tax of £54 million (2016: £71 million), impacted by non-underlying finance costs of £30 million (2016: £7 million)

Ø Basic earnings per share of 11.2p (2016: 14.2p) which, adjusting for non-underlying items, delivers underlying earnings per share# growth of 5%, at 20.5p (2016: 19.6p)

Ø Announcement of a further £20 million share buyback programme commencing with immediate effect

Good operational and strategic progress

Ø On track with the evolution of our operating divisions

· Publican Partnerships

o Like-for-like net income# up 2.3% (2016: up 2.1%) with growth across all geographic regions

o Average net income per pub# up 5.0% to £79,600 (2016: £75,800)

o Continuing to manage the implications of the Pubs Code

· Commercial Properties

o High quality portfolio of 331 (2016: 273) properties generating net annualised rental income of £23 million on assets valued at £271 million, representing a yield of 8.4%

o Average net income per property# up 9.2% to £66,800 (2016: £61,200)

· Managed Operations

o Performance on track with 226 (2016: 99) pubs trading within our 100% owned Managed Operations with 48 (2016: 28) trading within our Bermondsey operation and 178 (2016: 71) within our drinks-led Craft Union operation.

· Managed Investments

o Good progress with 30 (2016: 8) pubs trading within our managed investments business with 9 specialist partners

Ø Stable and robust balance sheet and cash flows

· Annual estate valuation increased for second consecutive year, up 0.2% (2016: up 0.1%)

· Strong operating cash flows of £261 million (2016: £269 million) and disposal proceeds of £100 million (2016: £98 million) fund capital investment of £80 million (2016: £74 million) and debt reduction

· Sufficient available bank facilities to repay the £100.5 million corporate bond due in December 2018

· Net debt reduced to £2.1 billion (2016: £2.2 billion), equivalent to loan-to-value of 58%

Commenting on the results, Simon Townsend, Chief Executive Officer said:

"We are making good progress against the strategy we set out in May 2015, which represents the most effective means to unlock embedded value within our estate. We are delighted with the continued growth momentum in our leased and tenanted business, achieved within the regulatory framework of the Pubs Code. At the same time we are developing a quality commercial property portfolio and our managed operations and investments businesses are going from strength to strength. We are delivering on our plans for the transformation of the Group and are now beginning to accelerate the execution of these plans as our financial metrics and balance sheet continue to strengthen.

We are mindful of current economic and political uncertainty and the inflationary cost headwinds faced by our industry, notably the rising minimum wage and above inflation increases in business rates, but our flexible business model and robust financial position leave us well placed to succeed despite these conditions.

The current financial year has started well and we are on track with our plans. We aim to deliver positive like-for-like net income growth in our leased and tenanted and commercial estates for the year ahead, and we are encouraged by the trading performance of our expanding portfolio of managed houses.

As we enter the third year of our strategic implementation we are increasingly confident in the progress made with our operating divisions making good headway, our balance sheet and finances robust and our route to shareholder returns clear. This continued successful implementation of our strategy gives us the opportunity to announce a further £20 million share buyback programme, consistent with our commitment to deliver long-term growth in shareholder value."

Enquiries: Simon Townsend, Chief Executive Officer 0121 272 5000

Neil Smith, Chief Financial Officer 0121 272 5000

Tulchan Communications, Jonathan Sibun/Peter Hewer 020 7353 4200

The Preliminary Results presentation will be available on the Company website at www.eigroupplc.com. A live video webcast of the presentation will be available on the investor zone section on the above website from 11.30am. Alternatively, a live conference call of the presentation can be accessed at 11.30am by dialling +44 (0) 20 3003 2666 or 1 866 966 5335 (USA callers). A replay of the conference call will be available for seven days on +44 (0) 20 8196 1998 and 1 866 595 5357 (USA callers) using replay passcode 4260062#.

 # Alternative Performance Measures (APMs)

In the reporting of financial information throughout these results, the Directors have adopted various APMs. These measures are presented in order to supplement reported results by providing further clarity on the Group's underlying performance and to present additional information that reflects how the Directors monitor and measure the progress of the Group. Further details and definitions of the APMs included in this announcement, including reconciliation to reported measures can be found in notes 4, 5, 6 and 11.

Forward-looking statements

This announcement contains certain statements about the future outlook for EIG. Although we believe that our expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

OPERATIONAL AND STRATEGIC REVIEW

Overview

We are pleased to report our full year results for the year ended 30 September 2017. We have delivered underlying EBITDA of £287 million, down £5 million on the prior year primarily as a result of planned asset disposals. Underlying profit before taxation was £121 million, down just £1 million on the prior year as underlying finance costs, resulting from reduced levels of debt, have largely offset the decline in EBITDA.

In May 2015 we announced the outcome of a strategic review that aims to optimise the returns from every asset within our property portfolio. Since announcement we have built the foundations for this strategy which will see the business evolve into a more flexible group, better able to respond to future changes in market conditions. We have substantially reorganised the infrastructure of the Group in order to facilitate our strategy, recruiting and developing the necessary skills to drive the performance of each of our business units. We are pleased with the progress we have made to date and are now accelerating the execution of the strategic transformation which we believe is the most effective means by which to deliver monetised returns for our shareholders.

The UK economy faces a number of potential headwinds and the hospitality and leisure sector is not immune to inflationary cost pressures, a challenging labour market, the impact of the National Living Wage, above inflation increases in business rates and a potential squeeze on consumer spending. However the diversity of our estate, the flexibility of our differing operating models and our disciplined approach to the deployment of capital and the management of costs leave us well placed to mitigate these challenges and to maintain our operational momentum.

The continued implementation of our strategic plan means that the Group now operates three reportable segments; Publican Partnerships, our leased and tenanted business; Commercial Properties, our free-of-tie pub and non-pub property business; and Managed businesses, which include 100% owned and operated pubs and joint investments with external specialist partners.

Publican Partnerships

Publican Partnerships is the trading name for our tied leased and tenanted business which is the largest part of our Group. Publican Partnerships contributed £325 million (2016: £343 million) to the underlying EBITDA of the Group reported in the year.

As at 30 September 2017, we had 4,051 (2016: 4,470) pubs trading within the leased and tenanted estate with average net income per pub growing by 5.0% to £79,600 (2016: £75,800).

In a year which has seen us accommodate the new Pubs Code regulatory regime and in which we have completed a comprehensive reorganisation of our operational structure, it is pleasing to see that on a like-for-like basis we have grown our net income by 2.3% (2016: 2.1%). Our Northern estate has sustained the positive momentum that was achieved last year, with further growth (income up 1.3%), while we have maintained our like-for-like net income growth in the Midlands (income up 2.1%) and delivered strong growth in the South (income up 2.8%).

Like-for-like net income growth in the leased and tenanted business has been maintained through the great work of our publicans supplemented by our business enhancing support. We believe that our continued willingness to invest capital alongside the best publicans; the provision of a broad range of business building services; and the proactive intervention of our regional managers provide the core pillars for continued improvement in the net income performance of our leased and tenanted pubs.

Whilst regulatory changes have meant that we have largely ceased investing significant capital in long-term leases, we will continue to work in partnership with our tenanted publicans to invest in our pubs to improve trading performance by enhancing the retail offer. In the year to 30 September 2017 we invested £20 million (2016: £28 million) in growth-orientated schemes across 351 (2016: 363) tied tenancies and have to date delivered an average pre-tax return on investment (ROI) of 21% (2016: 22%).

We provide our tied leased and tenanted publicans with a broad range of services to help them increase sales and reduce costs, and to operate their pubs efficiently and effectively. Our growing managed house and managed investment partnership businesses are now providing us with additional insight, experience and best practice with which to further enhance the support we can provide to tied lessees and tenants in the Publican Partnerships business. This year we have delivered our first Pub Principles guides - a series of business briefings designed to support publicans in critical areas of retail execution such as Cellar Quality and Social Media Management. These guides build on the learnings from our managed businesses and take advantage of best practice gleaned from our broad supplier partnerships. We have also increased our support in major marketing initiatives, and delivered a much improved and mobile-optimised online ordering platform to further ease publican ways of working. In publican recruitment we have launched a targeted social media strategy to better reach prospective publicans. During the current year we plan to develop our tools further to support our improvements in these areas and deliver more compelling support for our publicans to drive profitable sales whilst mitigating cost pressures in their pubs.

The ability to offset, where appropriate, the financial risks faced by publicans during periods of economic challenge is a unique attribute of the tied business model operated by our Publican Partnerships business. The proactive interventions of our regional managers to identify and then avoid potential business failures is particularly important when our publicans are likely to be facing increased inflationary pressures. Despite such increasing external pressures there was no material change in the number of unexpected business failures with 61, or 1.3% of the estate, (2016: 75, or 1.6% of the estate) suffering such failure in the period. Where appropriate we continue to provide direct financial assistance to tied publicans and this cost reduced to £4 million in the year (2016: £5 million).

The introduction of Market Rent Only (MRO) compliant agreements, which are a requirement of the Pubs Code which came into effect on 21 July 2016, did not materially affect the results for the financial year. The full impact is expected to take effect over many years, as MRO trigger events are largely expected to arise through the cycle of five yearly rent reviews and agreement renewals, which apply only to our leases.

From the date of the implementation of the new Pubs Code to 30 September 2017, there were 790 rent review or agreement renewal events which could potentially have triggered an MRO request. As required under the Pubs Code, we issued 209 MRO offers in response to requests by publicans of which 102 have been concluded by way of mutually agreed tied deals and 10 have been concluded with new mutually agreed free-of-tie terms. In addition, 2 pubs have been sold and 7 leases have been repurchased from the occupational tenant, with the balance of 88 not yet concluded. Of these, 60 have been referred to the Pubs Code Adjudicator for determination. It is our working assumption that the majority of those cases which have been referred to the Adjudicator will ultimately lead to new, free-of-tie agreements being granted.

For the 790 pubs referred to above there are 650 which are still operated by the same publican on either a tied or new free-of-tie terms and in the year to 30 September 2017 these pubs achieved like-for-like net income growth of 0.7% compared to the prior year. For the 112 pubs where an MRO offer was issued and a deal has been concluded like-for-like net income in the financial year was the same as the prior year. The growth rate of our income for these groups of pubs has not been as strong as the like-for-like net income growth of 2.3% achieved for the total estate reflecting, in part, the stronger negotiating position for publicans which the Pubs Code set out to achieve.

To mitigate our exposure to the effects of MRO we have reduced the number of longer-term leases and increased the proportion of our tied business operating under shorter-term tenancy agreements of up to 5 years in length. Since the concept of MRO agreements was first announced in November 2014 we have reduced the number of long-term agreements from 3,035 to 2,069 as at 30 September 2017.

Whilst it was considered to be appropriate to withdraw longer-term leases from our available suite of agreements for prospective publicans as we assessed the potential impact of MRO, we recognise that for certain publicans a longer-term tied lease agreement has many attractions, including the ability to build and realise capital value through the assignment of the remaining term of the lease. As a clear demonstration of our continued commitment and belief in the tied pub model, in October 2017 we launched two new 10-year lease agreements which, we believe, will attract quality pub operators who seek sufficient certainty of tenure to invest their own capital. Our new 10-year incentive lease offers the publican the opportunity to earn a significant incentive bonus at the expiry of the lease term provided an agreed sales volume target has been met. In our new 10-year investment lease, we will make a capital investment of at least twice the value of the existing annual rent which, as permitted by the Pubs Code legislation, removes a publican's entitlement to request an MRO offer at the initial five year rent review.  

Commercial Properties

We have continued to develop the skills and capabilities of our Commercial Properties division. The division contributed £21 million (2016: £15 million) to the underlying EBITDA of the Group reported in the year, with the average net income per property growing by 9.2% to £66,800 (2016: £61,200). Properties that traded as commercial properties throughout both the current year and the prior year delivered like-for-like net income growth of 1.4% (2016: 3.8%). 

As at 30 September 2017 we had 331 commercial properties, the vast majority of which trade as pubs on a free-of-tie basis. The underlying quality of these commercial properties continues to improve, evidenced by the average annualised rental income per property increasing to £69,000 (2016: £62,000). These assets represent investment properties and are now sufficiently material to the Group that we report them separately on the balance sheet. They operate under open market commercial terms which typically attract a higher valuation multiple. These properties have a total annualised rental income of £23 million and were valued at 30 September 2017 at £271 million, resulting in a gross yield of 8.4%. Excluding 45 sites which are held under leases, the gross yield on commercial property freehold sites was 7.6%.

We intend to continue the expansion of our high quality commercial property portfolio through open market negotiations with exceptional operators who offer good covenant strength, running highly profitable businesses in well-located properties. In the last two years we have entered into 168 new free-of-tie agreements, on terms that are common in the market place for commercial free-of-tie leases, at an average annualised rental income of £77,000 over an average term of 19 years.

During the period, we completed the redevelopment of the upper floors of the Wheatsheaf, Tooting, creating 7 residential apartments whilst retaining a fully functioning pub on the ground and first floors. The combined income of the residential units and the free-of-tie pub is expected to exceed £300,000 per annum and at the year-end was valued at £4.4 million, an increase of £2.8 million on the historic book value of the premises achieved from a capital investment of £1.6 million. We also completed the sale of a parcel of land for residential development at the Full Pitcher, Ledbury, by relocating the town cricket club who occupied the land, building alternative premises for the club and gifting them the freehold title to the grounds and clubhouse in perpetuity, unlocking £2.4 million of embedded value as a result.

On 16 March 2017 we sold a package of 18 commercial properties to investment clients of OLIM Property which comprised 13 pubs and 5 convenience stores geographically spread across England. The transaction generated £20 million of net proceeds, representing a 15% premium to the prior year-end book value and a 6.57% yield based upon the gross rental income of £1.33 million. This package disposal demonstrates the inherent realisable value of the portfolio and our willingness to monetise the value that we have unlocked in our estate where appropriate. We may consider further package disposals in the future although optimal value may be better achieved for shareholders through growing the scale and quality of the portfolio to a level where the economic benefits of a bulk disposal or establishment of a REIT could potentially be secured.

Reflecting this value-led approach, and the lower than expected number of conversions to free-of-tie agreements from tied publicans exercising the MRO option, we now expect to be operating in the region of 400 commercial properties by 30 September 2018 at an average annualised rental income per property in excess of £70,000. Whilst we expect the rate of conversion to free-of-tie agreements to increase, our focus on ensuring we build a quality estate means that we expect our commercial property business will grow to be in the region of 600-700 assets by September 2020, which is lower than our previous forecasts. In the short-term a smaller commercial property operation than originally expected means a larger tied leased and tenanted business which is likely to be beneficial to Group net income.

Managed Pubs

Our managed pubs contributed £13 million (2016: £4 million) to the underlying EBITDA of the Group reported in the year, with those sites that traded as managed pubs throughout both this year and the prior year delivering like-for-like sales growth of 2.4%. Whilst currently a relatively small business we are building the capability to operate a significant managed house business and we are pleased with the progress made to date.

Our segmentation model confirms that our existing pub estate provides us with a robust pipeline for the future expansion of our managed retail formats and we are confident that the original target, set in May 2015, of a managed house estate comprising around 800 pubs by September 2020 remains deliverable.

Profile of pubs under management:

Managed Operations: Craft Union Pub Company

Our largest managed house operation is the Craft Union business which operated 178 sites at 30 September 2017. We expect it to be operating around 270-280 sites by 30 September 2018. This business now operates nationally, and its retail offer is drinks-led with quality beers, at affordable prices, served in local, well-invested, community pubs. The simplicity of the offer helps mitigate execution risk and improves the efficiency of our capital investment whilst utilising our economies of scale to drive down operating costs. We are trialling a simple food offer within three Craft Union sites to assess the operational implications and the financial benefits of a broader consumer offer whilst ensuring that we do not sacrifice the operational simplicity and efficient profit conversion that are key benefits of the Craft Union operating model.

As at 30 September 2017, we had 84 pubs operating within the Craft Union business that had been invested in and traded for more than six months. To that date, these pubs generated average annualised site EBITDA of £90,000, from an average capital investment of £137,000, which delivered a ROI of 26%. As the estate matures and we further develop the consumer offer we would expect our Craft Union sites to generate average site EBITDA in the range of £80,000 to £100,000. After an average capital investment in the region of £120,000-£130,000, we expect to deliver a ROI in excess of 20%.

Managed Operations: Bermondsey Pub Company

As at 30 September 2017 we operated 48 managed pubs within our Bermondsey business. We expect to have in the region of 60-65 pubs in this model by 30 September 2018. All of these Bermondsey pubs operate under our successful Meeting House format, an upper mid-market, mixed food and drink offer. We have tailored the Meeting House format to satisfy a variety of consumer occasions, allowing us to further enhance our future site selection and investment decision analysis.

As at 30 September 2017 we had 25 pubs operating within our Bermondsey business that had been invested in and traded for more than six months. To that date, these pubs generated average annualised site EBITDA of £118,000, from an average capital investment of £211,000, which delivered a ROI of 21%. As we enhance our offers within the Bermondsey business we would expect the average capital investment to be in the region of £200,000 with average site EBITDA expected to grow to be in the range of £125,000 to £175,000, which we expect to deliver a ROI in excess of 15%.

Managed Investments

Within our Managed Investments business we have developed a partnership model whereby we can work with carefully selected managed house operators to share in the benefits of trading in certain high quality and specialist retail segments.

At the financial year end we had 9 partnerships with the creation of: Hippo Inns, established with the founder of Geronimo Inns; Mash Inns, a venture with Laine Pub Group; Frontier Pubs, a venture with Food & Fuel; Hunky Dory Pubs in conjunction with Oakman Inns; Marmalade Pub Company, a venture with the Marylebone Leisure Group; Dirty Liquor, a venture with Sourdough Saloon; Bestplace, a venture with PubLove, a multi-site pub and boutique hostel operation; Six Cheers, a venture with Three Cheers and Hush Heath Inns, a venture with Richard Balfour-Lynn. Our Managed Investments partnerships predominantly operate in premium consumer segments with attractive price elasticities and are therefore able to mitigate the inflationary headwinds that are challenging for more value-orientated, food-led businesses.

As at 30 September 2017 we had 30 pubs trading under our various relationships. Having now established 9 partnerships our focus in the coming year will be to expand the operational scale of these businesses by growing the number of pubs with each partner such that by 30 September 2018 we expect to be operating in the region of 60-65 pubs in this model.

As at 30 September 2017 we had 13 pubs operating within our Managed Investments business that had been invested in and traded for more than six months and these pubs to that date generated average annualised site EBITDA of £230,000, from an average site capital investment of £530,000, which delivered a ROI, excluding the relevant partner's minority interest, of 17%. As we evolve and grow the mix of operators within the Managed Investments business we would expect the average capital investment to be in the region of £400,000 to £500,000 with average site EBITDA to be in the range of £150,000 to £250,000, which we expect to deliver a ROI in excess of 20%.

Optimising capital allocation to enhance returns

We generate significant cash flows from trading activities supplemented by the proceeds of disposals, predominantly of under-performing assets. We have established a returns-based approach to the utilisation of our future cash flows which seeks to continue to reduce the level of our outstanding debt but also to provide a balance between additional value enhancing investment opportunities and more immediate returns to shareholders.

Our capital allocation framework ensures that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and other debt refinancing objectives, followed by on-going investment in our business. We are committed to gradually reducing our leverage over the medium-term and, assuming we are on track to satisfy this objective, then any "excess" cash flow can be assessed for alternative use, including in particular, further investment in the estate or the return of capital to shareholders.

In March 2016, applying our capital allocation framework, the Board utilised excess cash flow to fund the cost and premium associated with the then early redemption of £250 million of the secured corporate bonds due in 2018 and to return £25 million to shareholders via a share buyback of EIG shares for cancellation. The refinancing of the £250 million secured corporate bonds was completed in November 2016. The share buyback programme was initiated on 31 March 2016 and completed on 31 January 2017 with EIG having purchased 24.1 million shares at an average price of 104p per share.

The Board continues to review the optimal use of excess cash flow on a regular basis. Looking forward the Board has in place sufficient debt facilities to repay the £100.5 million corporate bond due in December 2018 and expects the business to generate at least £20 million of excess cash flow in the current financial year. Taking this into account and based upon current trading and the good progress the Group is making against our strategic objectives the Board has approved the return of a further £20 million to shareholders via a share buyback programme which will commence immediately.

OUTLOOK

Trading in the first six weeks of the new financial year was in line with our expectations. We are mindful of the inflationary pressures faced by our publicans and will continue to provide proactive support where appropriate. Whilst we have seen little evidence of the potential impact upon consumer spending from the continuing economic uncertainty and have suffered no material impact from the evolving Pubs Code, we remain vigilant regarding possible headwinds that may yet arise.

We aim to achieve positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year, we are encouraged by the trading performance of our expanding portfolio of managed pubs, and we remain committed to the successful implementation of our strategic plan to deliver long-term growth in shareholder value.

FINANCIAL REVIEW

Income statement

We delivered underlying EBITDA of £287 million, down £5 million compared to the prior year primarily due to our planned disposal programme. Leased and tenanted estate like-for-like net income, the primary component of our underlying EBITDA, is derived from our rental income and our net income from the sale of beer and other products to our publicans. Adjusted for the effect of disposals we saw our like-for-like leased and tenanted net income grow to £322 million (2016: £315 million). Our like-for-like net income from rents was in line with last year, primarily assisted by growth at rent reviews and the reduction in unplanned business failures, whilst our net income from beer supply grew by £6 million as pricing and mix benefits, net of discounts, offset volume decline. In addition we saw a £1 million saving on the discretionary support provided to publicans.

Underlying administrative costs in the year were £42 million (2016: £40 million), reflecting the recruitment of additional capability to assist in the delivery of our strategic objectives and additional administrative costs arising from the introduction of the Pubs Code. We expect current year underlying administrative costs to be in the region of £43-44 million.

Underlying net finance costs of £149 million were £5 million lower than the prior year as a result of our planned debt reduction.

Total pre-tax non-underlying charges were £63 million (2016: £47 million) comprising £30 million (2016: £7 million) in respect of debt refinancing costs; £24 million (2016: £37 million) in respect of property net charges and £9 million (2016: £3 million) of other charges. The property charges were made up of £4 million (2016: £18 million) arising from the annual revaluation exercise; a charge of £20 million (2016: £15 million) on the revaluation of assets on transfer to non-current assets held for sale; a profit on the disposal of property (before goodwill allocation) of £10 million (2016: £5 million) and a £10 million (2016: £9 million) charge relating to goodwill allocated to those disposals. The other charges in the period related to £6 million (2016: £3 million) of surrender premiums paid to publicans to recover control of our pub assets and £3 million (2016: nil) of restructuring costs incurred as we have reorganised the business to meet our future needs.

Total tax in the period was a charge of £4 million (2016: £4 million), representing a charge of £22 million (2016: £25 million) on the underlying trading profit and a credit of £18 million (2016: £21 million) relating to the tax on non-underlying items. The effective tax rate on the underlying trading profits arising in the period was 18.2% (2016: 20.1%), which is in line with our estimated effective tax rate for the current financial year.

Statutory profit after taxation was £54 million (2016: £71 million) which reflects the stable underlying profit of the business and the higher non-underlying items detailed above.

Underlying earnings per share (EPS) of 20.5p, were up 0.9p on the prior year. Basic EPS was 11.2p compared to 14.2p in the prior year, primarily due to higher non-underlying charges incurred in respect of debt refinancing.

Cash flow

Net cash flow from operating activities at £261 million (2016: £269 million), was lower than the prior year due to lower operating profit and in part due to tax payments in the prior year being £5 million lower than the current period due to repayments from HMRC in respect of prior year overpayments and capital allowance claims.

Net cash flow from investing activities created an inflow of £20 million (2016: £24 million). We reinvest our net disposal proceeds into capital investment in the estate, with the net proceeds received from disposals of £100 million (2016: £98 million) funding the £80 million (2016: £74 million) invested in the period. Disposal proceeds in excess of our capital investment requirements were used to reduce net bank debt.

Total capital investment in the year was £80 million (2016: £74 million), of which 60% (2016: 57%) was directed towards income growth opportunities. We target a ROI in excess of 15% on our growth-oriented capital expenditure and have achieved an average ROI of 20% (2016: 22%) on all such schemes delivered over the last twelve months.

Financing cash flows of £275 million (2016: £275 million), primarily reflect interest paid of £149 million (2016: £154 million), net loan repayments of £77 million (2016: £104 million), net share repurchases of £16 million (2016: £11 million) and refinancing costs of £33 million (2016: £7 million).

Balance sheet

Our balance sheet remains strong with a total net asset value of £1.50 billion (2016: £1.45 billion), primarily represented by £3.63 billion (2016: £3.66 billion) of property assets offset by net debt of £2.1 billion (2016: £2.2 billion). The property asset valuation reflects the valuation undertaken as at 30 September 2017. The Unique property estate is valued by Colliers International and the assets that secure the EIG corporate bonds are valued by GVA Grimley with the balance of the estate valued internally. The basis of the valuation is consistent with the prior year with 95% of the property portfolio valued by independent external valuers. The result from this year's valuation was a net increase in the total value of the estate by £7 million, or 0.2%, compared to an increase in the prior year of £3 million, or 0.1%.

The share price at 30 September 2017 of £1.38 (2016: £0.93), which equates to an equity value of £661 million (2016: £454 million), compares to a net asset value per share of £3.13 (2016: £2.96). We believe that the continued successful execution of our strategic plan, which will optimise the use and value of our asset portfolio, should lead to a significant reduction of this value differential.

Capital structure

We have a long-term, secure, flexible and tax-efficient financing structure comprising bank borrowings, securitised notes and corporate bonds. We are a cash generative business and have, over the past few years, used excess cash flows to reduce debt. During the year we have used cash generated by the business to meet the scheduled amortisation of securitised notes leaving total net debt at £2.1 billion (2016: £2.2 billion).

Corporate and convertible bonds

As at 30 September 2017 we had £1,125 million (2016: £1,125 million) of secured corporate bonds outstanding which are non-amortising, secured against ring-fenced portfolios of freehold pubs and attracting fixed interest rates averaging approximately 6.4% (2016: 6.5%).

On 4 November 2016, we completed a partial refinancing of our corporate bonds. Prior to the refinancing, £350.5 million of secured corporate bonds due in 2018 were outstanding with a coupon of 6.5%. We repurchased £250 million of these bonds at a cash purchase price of 111% of their principal amount, resulting in a cash payment of £28 million, which has been recorded as a non-underlying finance charge in the year. The repurchase was financed by the issue of a new £250 million secured corporate bond due in February 2022 at a coupon of 6.375%. The result of the transaction is a reduction of the principal amount of the corporate bonds due in 2018 to £100.5 million.

In addition to the corporate bonds, we have unsecured seven year convertible bonds that were issued in September 2013 for gross proceeds of £97 million. The convertible bonds have a coupon rate of 3.5% and are convertible at a share price of £1.91 into 50.8 million ordinary shares at any time up to 2020.

Bank borrowings

As at 30 September 2017 our drawn bank borrowings net of Company cash were £29 million (2016: £32 million). On 24 October 2016 the Group replaced its existing £138 million revolving credit (RCF) with a new £120 million facility. Furthermore, on 14 March 2017, the £120 million non-amortising RCF was increased in size to £140 million on the same terms. The facility is available through to August 2020 and attracts a coupon rate of 3% above LIBOR applicable to any drawn portion of the facility.

On 19 September 2017 the Group signed a new £50 million term loan facility, which is undrawn as at 30 September 2017, available for drawing until December 2018 with repayment of the amount drawn due by July 2020. The facility has been established to provide additional funds, if required, for the settlement of the £100.5 million corporate bonds due in December 2018. For the first year following utilisation it will attract an interest rate of 3.1%-3.3% above LIBOR, depending on the satisfaction of certain "green lending" covenants, applicable to any drawn portion of the facility. The interest rate increases by 1% for the second year post utilisation and a further 0.5% for the period thereafter. Any undrawn amounts available attract a commitment fee of 1% until drawn or cancelled.

Securitised notes

During the year we used operational cash generated from the business to repay, in accordance with scheduled amortisation, £77 million (2016: £74 million) of the Unique A3 and A4 securitised notes, which left £1.0 billion (2016: £1.1 billion) outstanding at 30 September 2017. The notes amortise over a period to 2032 and attract interest rates of between 5.7% and 7.4%. As at 30 September 2017 the Group was £76 million (2016: £80 million) ahead of the amortisation schedule of the "class A" securitised notes through early repayment and market purchases. Scheduled amortisation will require us to make payments of £81 million in 2018, £85 million in 2019 and £89 million in 2020.

W S Townsend

21 November 2017

Group income statement

for the year ended 30 September 2017

Statement of comprehensive income

for the year ended 30 September 2017

Group balance sheet

as at 30 September 2017

\* The figures at 30 September 2016 have been restated for the reclassification of investment property, as detailed in note 2 to this statement.

Group statement of changes in equity

at 30 September 2017

Group cash flow statement

for the year ended 30 September 2017

Notes

The financial information for the years ended 30 September 2017 and 2016 is based on the statutory accounts for those years. The auditor issued unqualified opinions on the statutory accounts for those years which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and which did not contain a statement under s498(2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 30 September 2016 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 September 2017 have not yet been delivered to the Registrar of Companies. The information contained in this announcement was approved by the Board on 20 November 2017.

These results have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Other than as explained below, these preliminary financial statements have been prepared on a consistent basis using the accounting policies set out in the Annual Report and Accounts for the year ended 30 September 2016. New standards and interpretations issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee becoming effective during the year have not had a material impact on the results or the financial position of the Group.

The Group leases some properties on commercial leases within the Commercial Properties segment. As this segment expands the Group recognises that the value attributed to these assets is now a material balance and has consequentially reclassified this balance from property, plant and equipment to investment property in the balance sheet. The impact of this change is that all revaluation movements on investment property are recognised in the income statement, rather than impacting the revaluation reserve.  Although the balance sheet amounts have been reclassified for the comparative period, a balance sheet for the year ended 30 September 2015 has not been presented as this has been assessed as not material. The impact on the income statement has also been assessed as not material and it has therefore not been restated.

The Directors have considered the Group's financial resources including a review of the medium-term financial plan, which includes a review of the Group's cash flow forecasts for the period of at least 12 months from the date of approval of this statement and the principal risks facing the Group.

The Group has five distinguishable operating segments being Publican Partnerships, Commercial Properties, Bermondsey Pub Company, Craft Union Pub Company and Managed Investments which reflect the different nature of income earned, types of property and profile of customers. The five segments have been identified because the Chief Operating Decision Maker (CODM) regularly reviews discrete financial information relating to them.

Operating segments are aggregated when they have similar economic characteristics and therefore Bermondsey Pub Company, Craft Union Pub Company and Managed Investments have been combined as they represent income earned from the direct operation of pubs albeit through differing trading styles. This results in three reportable segments being Publican Partnerships, Commercial Properties and Managed. As the Group progresses with the reallocation of pubs between these segments it is now considered appropriate due to materiality to disclose segmental information.

The CODM reviews the financial results by segment to underlying EBITDA and this therefore provides the basis for the disclosures below. The prior period results have also been analysed on a consistent basis to show comparative information for the reportable segments.

All of the Group's revenue is generated in the United Kingdom and is not further segmented based on location, therefore no geographical segmental analysis has been provided. The balance sheet is not reviewed by the CODM on a segmented basis and therefore no disclosure has been made in relation to segmental assets and liabilities.

4. Non-underlying items

The Group uses adjusted figures as key performance measures in addition to those reported under IFRS, as management believe these measures better reflect the ongoing trading transactions and enable better comparability and accountability for performance for them and other stakeholders. Adjusted figures exclude non-underlying items which comprise exceptional items, non-recurring items and other adjusting items.

Non-underlying items include reorganisation costs, assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review, the profit/loss on sale of property, the movement in valuation of the estate and related assets and costs incurred in respect of refinancing.

The adjusted figures are derived from the reported figures under IFRS as follows:

Those items identified as non-underlying are explained further below:

a) Operating costs before depreciation and amortisation

A charge of £9 million (2016: £3 million) has been incurred in respect of assignment premiums paid and reorganisation costs.

During the period of our strategic change, the £6 million (2016: £3 million) of assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal would be treated as non-underlying. These costs have been incurred following the strategic review and are not considered to be part of the underlying business as they are not expected to recur once the strategic realignment of properties has been completed. This period will allow a full cycle of rent reviews over which time the Group will assess the optimal strategic location for each asset which may include the payment of an assignment premium to allow the Group access to the property.

In addition, during the year, £3 million (2016: £nil) of restructuring costs were incurred as we have reorganised the business to meet our future needs and these charges have been allocated to non-underlying as they are one-off in nature.

During the year 224 properties (2016: 226 properties) and various other plots of land with a book value of £86 million (2016: £91 million) were disposed of generating gross proceeds of £109 million (2016: £104 million) which, after taking account of disposal costs resulted in an overall profit of £10 million (2016: £5 million).

Included within the total profits on sale of property above of £16 million, £11 million related to 21 properties and various plots of land with a 'special interest' value to particular buyers. The remaining profits of £5 million arose on 98 properties sold at an average profit of £51,000. The total losses on sale of property above of £6 million related to 105 properties sold at an average loss of £57,000.

In accordance with IAS 36 purchased goodwill is allocated to operations disposed of. Accordingly, goodwill of £10 million (2016: £9 million) has been allocated to the 224 properties (2016: 226 properties) disposed of during the year.

 c) Movements in valuation of the estate and related assets

A valuation of the entire estate excluding non-current assets held for sale has been carried out at the year end. The result of the valuation is that the estate, excluding non-current assets held for sale, has increased in value by £7 million (2016: £3 million). Of this net increase, £11 million (2016: £21 million) has been credited to other comprehensive income and £4 million (2016: £18 million) has been charged to the income statement as a non-underlying item. The £4 million charge, reflects a charge of £11 million (2016: £19 million) for property value movements below historic cost for properties held in property, plant and equipment and a £7 million (2016: £1 million) credit for the fair value movement for pubs held as investment property.

In respect of assets revalued on transfer to non-current assets held for sale, a total net write-down of £26 million (2016: £16 million) has been recorded. Of this net write-down, £6 million (2016: £1 million) has been debited to other comprehensive income and £20 million (2016: £15 million) has been charged to the income statement as a non-underlying item. At the year end, there are 85 properties (2016: 68 properties) included within non-current assets held for sale which have been recorded at the lower of carrying value on transfer to non-current assets held for sale, as assessed at the time of transfer, and fair value less costs to dispose.

d) Finance costs

On 24 October 2016 the Group replaced its existing £138 million RCF with a new £120 million facility. Furthermore, on 14 March 2017 the £120 million non-amortising RCF was increased in size to £140 million on the same terms. The facility is available through to August 2020 and attracts an interest rate of 3% above LIBOR applicable to any drawn portion of the facility.

On 4 November 2016 the Group completed a partial refinancing of the 2018 corporate bond. The partial refinancing results in a lower interest coupon and an extended debt maturity. Prior to the refinancing £350.5 million of 2018 secured corporate bonds were outstanding with a coupon of 6.5%. The Group received and accepted tender instructions for £250 million of these bonds at a cash purchase price of 111% of their principal amount. In connection with this partial refinancing the Group issued new £250 million secured corporate bonds, due in February 2022, at a coupon of 6.375%, resulting in a reduction of the corporate bonds maturing in 2018 to £100.5 million. The new issue benefits from a security package on substantially the same terms as the 2018 bonds.

The total cash outflow arising from the bank and bond refinancing was £32 million, being £28 million in respect of the repurchase premium on the extinguished bond, which has been charged to the income statement, and total fees and disbursements of £4 million, of which £2 million has been charged to the income statement and £2 million arising on the new bank facility has been deferred over the life of the new debt instrument. Furthermore on 19 September 2017 the Group signed a new £50 million term loan facility, which is undrawn as at 30 September 2017, available for drawing until December 2018 with repayment of the amount drawn due by July 2020 which resulted in £1 million of fees that have been deferred over the life of the new facility.

During the prior year the Group completed a full strategic and legal review of our capital structure to ensure that it did not constrain our ability to execute our operational strategy. A significant output of this review was the consent solicitation approved by the noteholders of the Unique securitisation voting in favour of proposals to amend certain aspects of the documentation to permit increased numbers of managed houses within the securitisation. Of the total fees incurred in this strategic review, £7 million was recognised in the income statement and £7 million was deferred over the remaining life of the Unique securitised notes.

5. Taxation

The total tax charge of £4 million (2016: £4 million) represents an underlying charge of £22 million (2016: £25 million) and a non-underlying credit of £18 million (2016: £21 million).

a) Underlying tax

The underlying tax charge of £22 million (2016: £25 million) equates to an effective tax rate of 18.2% (2016: 20.1%). The effective tax rate does not include the effect of non-underlying items.

b) Non-underlying tax

The items below are classified as non-underlying due to their size and either because they do not relate to any income or expense recognised in the income statement in the same period or because they relate to non-underlying items.

A deferred tax liability has been recognised on the balance sheet relating to the estate. On transition to IFRS, the Group elected to apply IFRS 3 retrospectively to acquisitions from 1 January 1999 which led to an increase in goodwill in respect of this deferred tax of £330 million. As this pre-acquisition liability changes due to capital gains indexation relief and changes in the rate of UK tax, the movement is recognised in the income statement. The impact of capital gains indexation relief is calculated based on the movement in the Retail Price Index (RPI). A credit of £4 million (2016: £1 million) has been recognised in the income statement as non-underlying due to its size and because it does not relate to any income or expense recognised in the income statement in the same period.

The current rate of corporation tax is 19%, however the Government announced in March 2016 a reduction in the rate of corporation tax to 17% by 1 April 2020 which was enacted during the prior year. Deferred taxation has been calculated based on the current substantively enacted rate of 17% (2016: 17%) resulting in a rate change tax credit of £nil (2016: £9 million).

A deferred tax credit of £4 million (2016: £4 million) relating to the movements in valuation of the estate and related assets and net profit/(loss) on disposal of property has been recognised in the income statement.

A non-underlying tax credit of £10 million (2016: £7 million) has been recognised in relation to all other non-underlying items in the income statement. The total non-underlying tax credit is therefore £18 million (2016: £21 million).

c) Tax recognised in other comprehensive income

A credit of £3 million (2016: £nil) has been recognised in other comprehensive income related to the tax on the revalued estate.

In addition, a credit of £nil (2016: £24 million) has been recognised in other comprehensive income following the restatement of the deferred tax liability for the change in UK tax rate.

The calculation of basic earnings per share is based on the profit attributable to Ordinary Shareholders for the year divided by the weighted average number of equity shares in issue during the year after excluding shares held by trusts relating to employee share options and shares held in treasury.

Underlying earnings per share, which the Directors believe reflects the underlying performance of the Group, is based on profit attributable to Ordinary Shareholders adjusted for the effects of non-underlying items net of tax, divided by the weighted average number of equity shares in issue during the period after excluding shares held by trusts relating to employee share options and shares held in treasury.

The dilution adjustments for share options and the convertible bonds are reviewed independently and where they are anti-dilutive to the calculation of diluted earnings per share they are not included in the calculation of both diluted and underlying diluted earnings per share.

For the year ended 30 September 2017, the adjustment for share options is assessed as being dilutive (2016: dilutive) which has resulted in an adjustment to the weighted average number of equity shares in issue during the year of 3.5 million shares (2016: 7.3 million shares).

For the year ended 30 September 2017, the adjustment for the convertible bonds is assessed as being dilutive (2016: dilutive) which has resulted in an adjustment to profit in the calculation of diluted earnings per share of £5.5 million (2016: £5.2 million) for the post tax interest cost associated with the convertible bonds and an adjustment to the weighted average number of equity shares in issue during the year of 50.8 million shares (2016: 50.8 million shares).

7. Property, plant and equipment

8. Non-current assets held for sale

When assets are identified for disposal and meet the criteria within IFRS 5 they are reclassified from property, plant and equipment to non-current assets held for sale and are revalued at that point to their fair value less costs to dispose.

Investment property assets are also moved to non-current assets held for sale at book value when they meet the criteria within IFRS 5.

At the end of the year non-current assets held for sale includes 85 properties (2016: 68 properties) which are expected to be sold within the next year.

9. Additional cash flow information

a) Reconciliation of net cash flow to movement in net debt

b) Analysis of net debt

Underlying net debt represents amounts repayable to banks and other lenders net of cash retained in the business. Cash includes £115 million held in the securitised Unique sub-group, of which £65 million is held in a securitised reserve account.

10. Post Balance Sheet Events

Based upon current trading and the good progress the Group is making against our strategic objectives, the Board expects the business to generate at least £20 million of excess cash flow in the current financial year. Applying the capital allocation framework, the Board intends to use this excess cash to fund a further share buyback of EIG shares for cancellation.

11. Alternative Performance Measures (APMs)

Like-for-like Publican Partnerships net income

Publican Partnerships like-for-like net income of £322 million (2016: £315 million) represents underlying EBITDA for the Publican Partnerships business of £325 million (2016: £343 million) excluding £2 million (2016: £13 million) of income in respect of disposals and £1 million of net income (2016: £15 million) relating to other non-like-for-like net income.

Like-for-like Commercial Properties net income

Commercial Properties like-for-like net income of £10 million (2016: £10 million) represents underlying EBITDA for the Commercial Properties business of £21 million (2016: £15 million) excluding £1 million (2016: £3 million) of income in respect of disposals and £10 million of net income (2016: £2 million) relating to other non-like-for-like net income.

Managed like-for-like sales

Managed like-for-like sales represents underlying revenue from the Managed estate of £80 million (2016: £28 million) excluding underlying revenue from those pubs that have not traded for two full years post investment in their managed format of £70 million (2016: £18 million).

Average net income per pub 

Average net income per pub represents the annual net income for Publican Partnerships assets trading at 30 September 2017 of £322 million (2016: £339 million) divided by the total Publican Partnerships assets trading at 30 September 2017 of 4,051 properties (2016: 4,470 properties).

Publican Partnerships net income of £322 million (2016: £339 million) represents underlying EBITDA for the Publican Partnerships business of £325 million (2016: £343 million) excluding £2 million (2016: £3 million) of income in respect of disposals and £1 million of net income (2016: £1 million) relating to other non-like-for-like net income.

Average net income per property

Average net income per property represents the annual net income for Commercial Properties assets trading at 30 September 2017 of £22 million (2016: £17 million) divided by the total Commercial Properties assets trading at 30 September 2017 of 331 properties (2016: 273 properties).

Commercial Properties net income of £22 million (2016: £17 million) represents underlying EBITDA for the Commercial Properties business of £21 million (2016: £15 million) excluding £1 million (2016: £1 million) of income in respect of disposals and including £2 million of net income (2016: £3 million) relating to the pubs before they were transferred to the Commercial Property segment offset by unlicensed property income.

Excess cash flow

Excess cash flow in the period was £23 million (2016: £48 million) and is derived from net cash flows from operating activities of £261 million (2016: £275 million) plus net cash flows from investing activities of £20 million (2016: £24 million) less net interest paid of £149 million (2016: £154 million) less debt extinguishment and restructuring costs of £33 million (2016: £23 million) less scheduled debt amortisation of £77 million (2016: £74 million) plus receipts from exercise of share options of £1 million (2016: £nil).

EBITDA

EBITDA represents earnings before finance costs, taxation, depreciation and amortisation.

Underlying EBITDA

Underlying EBITDA represents earnings before finance costs, taxation, depreciation and amortisation excluding non-underlying items. Non-underlying items that are excluded from underlying EBITDA include reorganisation costs and assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review.

Underlying profit before tax

Underlying profit before tax excludes non-underlying items. Non-underlying items excluded from profit before tax include reorganisation costs, assignment premiums paid to a publican in order to take the assignment of a lease or to break a lease at any point other than at renewal during the period of our strategic review, the profit/loss on sale of property, the movement in valuation of the estate and related assets and costs incurred in respect of refinancing.

Underlying earnings per share (EPS)

Underlying EPS is based on profits after tax excluding non-underlying items as explained above.

Growth driving capital investment

Growth driving capital investment is discretionary capital cash spend on the Group's assets which is intended to generate incremental income at returns ahead of our target return on investment.

Maintenance and letting capital investment

Maintenance and letting capital investment is all capital cash spend that is not growth driving capital investment, typically focused on maintaining the quality of our assets and supporting the letting programme.

Return on investment

Return on investment is measured as the incremental income delivered as a result of the investment divided by the value of the capital investment.

Unplanned business failures

Unplanned business failures are all lease and tenancy agreements that do not reach their full term, where failure is not through the mutual agreement of ourselves and the departing publican. For example, through publican abandonment or via legal proceedings.

ADDITIONAL INFORMATION

Principal risks and uncertainties

This section summarises the principal risks and uncertainties facing the Group. Full details of the principal risks and uncertainties are set out in the Annual Report and Accounts. This is not an exhaustive analysis of all the risks the Group may face and some risks have not been included in this section on the basis that they are not considered to be material. The Group has formal risk management processes in place to identify and evaluate these risks, however some of the risks are external and therefore beyond our direct control. The Board formally reviews all key risks and ensures that these are appropriately managed by the executive management team and the Board retains overall responsibility for the Group's risk management framework.

The internal audit function provides assurance to the Audit Committee on the effectiveness of the internal control procedures. This is done through completion of the annual internal audit plan, which takes into account current business risks. The Board has delegated to the Audit Committee responsibility for reviewing annually the overall effectiveness of the risk management programme.

In summary the most significant principal risks and uncertainties are:

Property valuations

Valuations of the Group's property portfolio have been affected by general economic conditions and resulting downwards pressure on maintainable income streams. These circumstances could continue and therefore reduce the valuation of the portfolio over time. There is a risk that future changes in the UK property market, including the uncertainty following the vote to exit the EU persisting, and general economic conditions could impact the value of our portfolio and the ability to dispose of underperforming pubs and the realisations from such disposals. Property valuations also have an implication for the overall value of the Group and impact on financial covenants.

Mitigation process: The Group ensures that every pub in its portfolio is valued annually at market value by qualified external and internal valuers in accordance with RICS Valuation Standards. These valuations comply with the requirements of International Financial Reporting Standards. The valuation this year has led to a marginal uplift in the book values of the pubs recorded in property, plant and equipment and investment property. While the valuers have noted some abnormal uncertainty in the property market following the vote to exit the EU, they have noted that there has been no material impact to-date and the market has remained strong post the vote.

Liquidity risk

The primary liquidity risks are the requirement to meet all on-going finance costs, repay the principal amounts of the securitised borrowings as they amortise and the corporate bonds as they fall due, ensuring there are sufficient funding facilities in place to enable the business to meet all cash flow requirements as they fall due and meeting the financial covenants associated with the financing structure.

Mitigation process: The Group has a flexible financing structure comprising bonds issued from the Unique securitisation (securitised bonds), corporate bonds issued by the Company and bank borrowings. The Board regularly reviews detailed financial forecasts to ensure there is sufficient cash available to meet the requirements of the Group. These reviews include the ability to meet restricted payment conditions in the securitised bonds in order that any excess cash is permitted to be released by the payment of dividends through the securitisation structure to the Company.

There are a number of options available to the Group to manage its financing commitments including the disposal of pubs, reducing capital expenditure on the estate as well as raising new capital through a bank facility or issuing new corporate bonds.

Throughout the year the Group tests all of the financial covenants and forecasts are prepared during the budgeting process. The Board regularly reviews detailed financial forecasts of the Group to ensure there is sufficient headroom on all covenants.

During the year, the Group: concluded the arrangement of a new bank facility of £140 million which extends to 2020, to replace its existing facility; completed a refinancing of £250 million of the outstanding £350.5 million corporate bonds due in 2018, with the new £250 million bonds being non-amortising and due in 2022; and, signed a new £50 million term loan facility to be available to be drawn down to partially fund the repayment of the remaining £100.5 million corporate bonds due in December 2018.

Regulatory factors

The Pubs Code came into effect on 21 July 2016. This includes a tenant's right, under certain circumstances, to change the freely-negotiated commercial terms of their agreement to a new MRO compliant agreement, and is overseen by an independent Adjudicator.

Whilst this has now been in place for over a year, there still remains a lack of clarity around some areas of the Code, leaving elements open to interpretation. The operation of the regime could have an impact upon our profitability, our operational strategy and our relationships with our publicans.

In addition, there is a risk that other changes to the regulations relating to the sale of alcohol could have an impact on the Group's business and the ability of our publicans to operate their pubs. These risks include changes to licensing legislation, increases to alcohol duties imposed by the Government and the impact of social responsibility issues on the industry in general.

Mitigation process: The Group already operated effective policies and procedures in order to satisfy the existing industry code of practice framework and we have ensured that our resource is suitably directed to maintain compliance with the Pubs Code.

In order to mitigate any potential impact to total income, the Group has adopted the necessary operational flexibility and capabilities to enable it to apply alternative operating models to the pubs in the estate that could potentially be affected by MRO. We also work closely with Local Authorities as necessary to ensure licensing requirements are dealt with whenever appropriate. The Group is a member of a number of trade bodies and associations, is a contributor to the Drinkaware Trust, and works closely with these organisations to promote responsible drinking practices.

Economic climate and market risk

The Group's operations are sensitive to economic conditions and the general economic outlook remains uncertain, particularly as the full impact of Brexit is unclear at the current time. As the Group's business operations are based in the UK and operate with sterling denominated domestic supply contracts, we do not believe that Brexit is likely to have a significant, direct impact on the Group. However it could impact the Group through its impact on the economy and restrictions on the migrant workforce.

As a consequence of exchange rate movements and various measures introduced by the Government, there are a number of increased inflationary pressures in the market, specifically relating to food purchases, business rates, the minimum living wage and pension contributions.

All of the above factors could impact publican profitability, due to decreased consumer spending or an increase in the underlying cost base, which in turn could impact Group profitability. The profitability of the Group's managed businesses could also be impacted by these factors.

Mitigation process: The Group regularly monitors its key income streams and publicans' performance to ensure the Group is competitively placed in the market, including regularly reviewing financial forecasts to assess the impact of economic conditions on its budget, strategic plans and its publicans. Careful consideration is given to all publicans' requests for additional operational and financial support as well as assessing appropriate investment in the development of our pubs to ensure that we remain competitively placed in the market. The Group is well positioned to manage the increased inflationary pressures in its managed businesses, as there is less exposure to food inflation and we have the ability to design our expanding managed businesses to accommodate the increased people costs. These costs are also, currently, relatively immaterial to the overall Group profitability. Also, the Group continues to foster mutually beneficial relationships with key suppliers to ensure the impact of any price increases is minimised wherever possible.